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Zhu, Song-Ping; Badran, Alexander; Lu, Xiaoping
Computers & mathematics with applications, October 2012, 2012-10-00, 20121001, Letnik: 64, Številka: 8Journal Article
In this study, we derive a new exact solution for pricing European options in a two-state regime-switching economy. Two coupled Black–Scholes partial differential equations (PDEs) under the regime switching are solved using the Fourier Transform method. A key feature of the newly-derived solution is its simplicity in the form of a single integral with a real integrand, which leads to great computational efficiency in comparison with other closed-form solutions previously presented in the literature. Numerical examples are provided to demonstrate some interesting results obtained from our pricing formula.
